PSYCH 105 Lecture 3Ch. 1 Managerial Accounting and Cost ConceptsOutline of Current Lecture I. Classifications of Manufacturing CostsII. Nonmanufacturing CostsIII. Product Costs Versus Period CostsIV. Classifications of CostsV. Cost Classifications for Predicting Cost BehaviorVI. The Activity Base (Cost Driver)VII. The Linearity Assumption and the Relevant RangeVIII. Fixed Costs and the Relevant RangeIX. Cost Classifications for Predicting Cost BehaviorCurrent LectureI. Classifications of Manufacturing Costs- Direct Materialso Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Ex: A radio installed in an automobile- Direct Laboro Those labor costs that can be easily traced to individual units of product Ex: Wages paid to automobile assembly workers- Manufacturing Overheado Manufacturing costs that cannot be easily traced directly to specific units produced Ex: indirect materials and indirect labor- Indirect Materials: Materials used to support the production processo Ex: lubricants and cleaning supplies used in the automobile assembly plant- Indirect labor: Wages paid to employees who are not directly involved in production work.o Examples: maintenance workers, janitors, and security guardsII. Nonmanufacturing CostsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Selling Costso Costs necessary to secure the order and deliver the product- Administrative Costso All executive, organizational, and clerical costsIII. Product Costs Versus Period Costs- Product costs include direct materials, direct labor, and manufacturing overhead- Period costs include all selling costs and administrative costsIV. Classifications of Costs- Manufacturing costs are often classified as:o Direct Materialo Direct Labor Which make up Prime Costo Direct Laboro Manufacturing Overhead Which make up Conversion CostV. Cost Classifications for Predicting Cost Behavior- Cost behavior refers to how a cost will react to changes in the level of activity.- The most common classifications areo Variable costs  Ex: Your total texting bill is based on how many texts you send Variable Cost Per Unit: The cost per text sent is constant at 5 centsper text messageo Fixed costs Ex: Your monthly contract fee for your cell phone is fixed for the number of monthly minutes in your contract. The monthly contract fee does not change based on the number of calls you make Fixed Cost Per Unit- Within the monthly contract allotment, the average fixed cost per cell phone call made decreases as more calls are made Types of Fixed Costs- Committed: Long term, cannot be significantly reduced in the short termo Ex: Depreciation on buildings and equipment and real estate taxes- Discretionary: May be altered in the short term by current managerial decisionso Ex: Advertising and Research and Developmento Mixed cost Also called semivariable costs A mixed cost contains both variable and fixed elements. Consider the example of utility cost The total mixed cost line can be expressed as an equation: Y=a+bX- Y=The total mixed cost- a=The total fixed cost (the vertical intercept of the line)- b=The variable cost per unit of activity (the slope of the line)- X=The level of activity Analysis of Mixed Costs- Account Analysis and the Engineering Approach- In account analysis, each account is classified as either variable or fixed based on the analyst’s knowledge of how the account behaves- The engineering approach classified cost based upon an industrial engineer’s evaluation of production methods, and material, labor, and overhead requirementsVI. The Activity Base (Cost Driver)- A measure of what causes the incurrence of a variable costo Units producedo Machine-hourso Miles driveno Labor-hoursVII. The Linearity Assumption and the Relevant Range- A straight line closely approximates a curvilinear variable cost line within relevantrangeVIII. Fixed Costs and the Relevant Range- Ex: Assume office space is available at a rental rate of $30,000 per year in increments of 1,000 square feeto Fixed costs would increase in a step fashion at a rate of $30,000 for each additional 1,000 square feet- The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flatIX. Cost Classifications for Predicting Cost BehaviorBehavior of Cost (within the relevant range)Cost In Total Per UnitVariable Total variable costincrease and decrease inproportion to changes inthe activity levelVariable cost per unitremains constantFixed Total fixed cost is not Fixed cost per unitaffected by changes in theactivity level within therelevant rangedecreases as the activitylevel rises and increases asthe activity level